Bacchus Corp Pty Ltd v Grapes of Australia Management Ltd [2003] VSC 29

Supreme Court of Victoria|2003-02-20|Before: HABERSBERGER J

CONTRACT - Agreement to provide marketing services - Whether agreement repudiated or terminated for cause - Question of fact - Quantification of damages - Lost net profit not gross income - Estimate of lost net profit.

In this proceeding, the plaintiff, Bacchus Corp Pty Ltd ("Bacchus"), sues the defendant, Grapes of Australia Management Limited ("GAML"), for damages for breach of contract. Bacchus alleges that GAML repudiated the agreement between them, and that Bacchus accepted that repudiation, in July 1999. The case was opened on the basis that Bacchus' damages were $177,404. GAML counterclaimed for damages for misleading and deceptive conduct by Bacchus and for unjust enrichment. The quantum of the counterclaim was said to be $75,942.14, being the sum previously paid by GAML to Bacchus pursuant to a statutory demand.

In early 1999, a second prospectus was prepared seeking further investments in the development and operation of "a large scale vineyard of approximately 600 hectares" known as Hillston Grove. The vineyard was situated 134 kilometres north of Griffith in New South Wales. The prospectus disclosed that the landowner was a company, Hillston Grove Vineyards Limited, and the manager was GAML. The directors of both of those companies were said to be Messrs William Morcom, Barry Silver and Rodney Jellyman. Mr Morcom was also the secretary of both companies.

Mr Silver said that he and Mr Morcom were also the joint chief executive officers of Investment Licensing Pty Ltd ("ILPL"), which was the only entity authorised to sell units in the Hillston Grove Vineyards project. ILPL had over 300 holders of proper authority attempting to market the project. By 1999, Mr Silver had practised as an accountant for 26 years.

Mr Steven Crouch, the sole director and shareholder of Bacchus, said that he heard of the Hillston Grove vineyard from his accountant, Mr Morcom, in 1998. Through Mr Morcom, Mr Crouch also met Mr Silver in 1998. Mr Crouch said that there were brief discussions at that time about him having some involvement as a marketing consultant to the project. At an early stage, Mr Crouch mentioned to Mr Morcom that it might be possible to engage the services of a winemaker, Mr Chris Cameron. Mr Crouch had met Mr Cameron through his brother and become friendly with him. At that time, Mr Cameron's 1996 merlot had just been awarded the prize for the Best Merlot at the 1999 International Wine and Spirit Competition in London.

In April and May 1999, Mr Crouch prepared a number of drafts of an agreement between his company, Bacchus, and GAML, which Mr Crouch and Mr Morcom had been negotiating. Mr Morcom suggested various amendments to the drafts. Indeed, Mr Crouch said in evidence that Mr Morcom had a "95 per cent" involvement in the drawing of the final form of the agreement between Bacchus and GAML. Part of the negotiations involved the provision of Mr Cameron's services to assist with the project's marketing in the three months leading up to the end of the financial year and subsequently in a technical capacity.

On 14 May 1999, a typed Memorandum of Agreement was signed by Mr Morcom, on behalf of GAML, and Mr Crouch, on behalf of Bacchus. The Memorandum of Agreement provided as follows:

"This memorandum will confirm the agreement between Bacchus Corp. Pty Ltd (BC) and Grapes of Australia Management Limited (GAML) whereby GAML will retain BC to provide the following to GAML. * Identify and develop related and complimentary [sic] businesses. * Provide the services of the senior marketing manager and to appoint associated consultants or staff acceptable to the Board of GAML. * To obtain the services of Mr Chris Cameron as Executive Wine Maker as per the agreement in Appendix 2. * To obtain the services of Chris Cameron to provide support and endorsement of the project prior to initial production as per the terms listed in Appendix 2. * To develop sales and marketing campaigns and programs to increase sales of the investment product. * To select, brief and co-ordinate specialist marketing service providers on behalf of HGV and GAML. * To increase the level of awareness of the tax benefits available through the ATO licence to both retail investors and professional advisers. * To develop an identity, image and market presence for Hillston Grove Wines and related products. * To develop an export plan and offshore marketing structure for Hillston Grove wines and related products. * To develop and establish wholesale and retail distribution networks for wine and grape juice within Australia. * To develop and establish related 'boutique' products and distribution. * To develop and introduce exclusive wine products for shareholders and investors. * To identify and develop related and complementary business opportunities from the estate. * The provision of specialist technical advice and/or advisers where requested or as required in principal functions on approval of the Board of GAML. * To locate, contract and appoint appropriate staff and management required to operate the winery profitably and efficiently, being - wine maker and auxiliary staff to manage and oversee the commercial operation of the winery. * To advise and support the Winery developers to develop the market reputation in Australia and Overseas. The terms of the agreement will initially be for 2 years commencing June 1st 1999. Remuneration, performance bonus and renewal terms are as per Appendix 1."

"Bacchus Corp. Pty Ltd (BC) will execute an agreement with Mr Chris Cameron 'CC' (or a nominated entity) as per Appendix 2. Grapes of Australia Management Limited (GAML) will re-imburse BC for all costs associated with the services provided by 'CC' as per Appendix 2. GAML will support BC with all the necessary marketing and support staff as budgeted and agreed to by the Board of GAML and BC. ... That included in this budget, BC's consulting package will be $12,500 per month paid on the first of each month for the 2 years of this agreement. That both BC and GAML have the right to terminate or modify this agreement if mutually agreed. That BC may terminate this agreement with 3 months notice in writing. That GAML may terminate this agreement in writing if BC fails to deliver within reasonably commercial terms the conditions of the Memorandum of Agreement as executed. ..."

"This agreement between Bacchus Corp. Pty Ltd, ACN 083886319 (BC) with the registered office at 1/10-12 York St, South Melbourne and Mr Chris Cameron (CC) of Halls Road, Pokolbin, NSW provides for the following: BC will initially retain the services of CC to provide support and personal endorsement to assist in the sale of investment units in Hillston Grove Vineyards Ltd (HGVL) by Grapes of Australia Management Ltd (GAML). CC will be required to attend and participate in 20 sales seminars over a period of 3 months from the date of the first seminar and agree to the use of CC's name and likeness in promotional activities. During the initial period of 3 months, CC will also be required to provide advice and recommendations in all aspects of the operation and design of a winery and the sale and marketing of bulk and bottled wines, grape juice and related products. CC or nominated entity will be entitled to receive a total remuneration of $45,000 in respect of services rendered plus any expenses previously agreed which are incurred in the provision of those services. Subsequently CC agrees to assume the role of 'Executive Winemaker' for HGVL for a period of 3 years. Duties and functions will include the management and direction of wine making, grape growing and harvesting, product development and sales and marketing advice and recommendation to CC's best endeavours. CC's involvement for the 3 year period will not be a full time position and will limited [sic] to an assessable 65 hours per month. GAML and BC will provide necessary and appropriate support staff and facilities and will provide communication and related technical support and equipment. The remuneration for the position of Executive Winemaker will be $10,000 per month paid monthly in arrears. Expenses incurred in the position will be repaid subject to prior approval of the Chief Executive of GAML. Subject to satisfactory performance and mutual agreement, BC and GAML will offer CC a full time position as Executive Winemaker at HGVL at the conclusion of the 3 year term (or earlier if appropriate) at a remuneration package to be negotiated in line with that provided by Pepper Tree Wines for the equivalent position and responsibilities."

Mr Crouch said that both he and Mr Cameron were involved with the project before and after the Memorandum of Agreement was signed by Mr Morcom on 14 May 1999. In April, May and June, Mr Cameron attended "a lot of sales seminars" organised by Messrs Morcom and Silver, although Mr Crouch could not say how many as he only personally attended several held in the Sydney area. Mr Crouch was also dealing with an advertising agency, Milne & Partners. However, he said that he was not able to devote himself full time to the project until the commencement date of the agreement, which was 1 June 1999.

On 2 June 1999, Mr Crouch flew to Hawaii to speak to several wealthy Americans whom Mr Crouch thought might be interested in investing up to US$20 million in the project. He returned to Sydney on 9 June 1999. Mr Crouch said that he paid for his airline ticket with his Diners Club card and that he was subsequently reimbursed by Mr Morcom.

On either 10 June or 1 July 1999, Mr Silver also signed the Memorandum of Agreement on behalf of GAML. I examine the circumstances surrounding this disputed event below.

On 24 June 1999, an advertisement appeared in the Australian Financial Review seeking investments in the Hillston Grove project. The advertisement referred to Mr Cameron's involvement. Mr Morcom paid Milne & Partners for the cost of placing the advertisement by a personal cheque dated 23 June 1999. But the advertising agency's fees were not paid.

On 15 July 1999, Mr Crouch faxed to Mr Silver "the accounts for the balance of the June Fin Review advertisement costs, an opinion regarding the legality of using the wine labels, the account for my services and the account for Chris Cameron's services and attendances as per the agreement." The enclosed accounts were a Bacchus account dated 15 June 1999 in the sum of $57,500 for Mr Cameron's fee of $45,000 and the first monthly payment to Bacchus of $12,500; a Bacchus account dated 15 July 1999 in the sum of $70,000 for the outstanding $57,500 plus the further monthly payment of $12,500; a Milne & Partners invoice in the sum of $5,632.14 for "the costs associated with the design, photography, finished artwork and production of release material" for the Financial Review advertisement; and an account from Anisimoff Davenport, solicitors, in the sum of $310.00 for legal advice.

Apparently the documents faxed to Mr Silver were quickly passed on to Mr Jellyman. Both Mr Silver and Mr Jellyman gave evidence that the existence of the Bacchus agreement and the Cameron agreement had only been revealed to Mr Jellyman by Mr Silver on 6 July 1999. They said that on that day Mr Silver rang Mr Jellyman to say that he was picking him up to take him to a meeting at Noosa. On the way there, Mr Silver told Mr Jellyman about the agreements. Mr Jellyman was furious. Mr Jellyman said that at the Sheraton Hotel in Noosa he met Mr Morcom and Mr Cameron. He was shown a copy of the two page Memorandum of Agreement by Mr Morcom. He could not be sure that he saw the two Appendices. Mr Jellyman asked Mr Cameron what his understanding of his agreement was, and was told that he was entitled to $15,000 per calendar month plus expenses for the first three months and $10,000 per calendar month plus expenses thereafter. Mr Jellyman said that he was so angry that the meeting lasted only a few minutes. He did not retain a copy of the Memorandum of Agreement.

The accounts from Bacchus must, therefore, have not been entirely unexpected by Mr Jellyman. He said that he rang Mr Crouch on 15 July 1999 and told him that the accounts would not be paid because Mr Morcom and Mr Silver did not have the authority to enter such an agreement. Mr Crouch said that this telephone conversation took place just before he was to get on an aeroplane on 17 July 1999, but I do not consider that it matters which day it occurred. If necessary, I find that it did occur on 15 July 1999 as recorded in Mr Jellyman's contemporaneous notes. Mr Crouch and Mr Jellyman were in general agreement about what was said during that telephone call.

By letter dated 15 July 1999, Mr Jellyman then wrote on behalf of GAML to Bacchus denying liability. The letter relevantly stated as follows:

"We refer to your facsimile dated today to Mr Barry Silver re Invoices and outstanding accounts. It is with considerable surprise and shock to this Company that this arrangement was ever considered, let alone entered into by Messrs. Silver and Morcom without prior Board and Shareholder agreement and approval in accordance with the existing arrangement between Directors and Shareholders. The writer and Mr D Boucher (both as Directors and Shareholders) have only today been delivered a copy of the agreement. Both Grapes of Australia Management Limited and Hillston Grove Vineyards Limited have already entered into a marketing agreement with another party. You are advised that both companies deny liability. This agreement is contrary to the existing arrangements within the companies and is considered by both companies to be void."

On 19 July 1999, McMahon Fearnley, the solicitors for Bacchus, sent a statutory demand to the registered office of GAML for payment of the debt of $75,942.14, which was the total of $45,000 in respect of Mr Cameron, $25,000 in respect of Bacchus, $5,632.14 in respect of Milne & Partners and $310.00 in respect of Anisimoff Davenport. Apparently the registered office of GAML was left unattended so that the statutory demand did not come to its attention until after the 21 day period for an application to set aside the demand or payment or securing of the debt had expired.

By letter dated 12 August 1999, McCullough Robertson, the Brisbane solicitors for GAML, wrote to McMahon Fearnley advising that their client disputed "the debt referred to in the demand on the basis that your client has failed to carry out the services required under the memorandum of agreement." On behalf of Bacchus, McMahon Fearnley accepted GAML's repudiation of the arrangement between them, by letter dated 17 August 1999. After unsuccessful settlement negotiations, GAML paid Bacchus the full amount of the statutory demand on 30 August 1999.

On 5 May 2000, Bacchus filed its writ against GAML. Messrs Morcom and Silver were also made defendants on the basis that if they did not have the authority of GAML to execute the Memorandum of Agreement (as previously stated by Mr Jellyman), then they had breached their warranty of authority to so act. As anticipated, by its initial defence, GAML denied that Messrs Morcom and Silver had the power or authority on behalf of GAML to enter into the agreement with Bacchus. Accordingly, it denied that there was any binding agreement between it and Bacchus. If there were such an agreement, then GAML pleaded that the payment of the sum of $75,942.14 was made in full and final satisfaction of any and all claims as between Bacchus and GAML, and that Bacchus was in substantial breach of the agreement, entitling GAML to terminate it. In May 2001, GAML filed an Amended Defence and Counterclaim in which it abandoned both the lack of authority and the prior settlement defences. This resulted in the claim against Messrs Morcom and Silver personally being discontinued.

In its May 2001 Amended Defence and Counterclaim, GAML pleaded that the alleged agreement was void for uncertainty. If there were such an agreement, GAML pleaded that it was induced to enter into the agreement by Mr Crouch fraudulently representing to Mr Morcom and Mr Silver that the services of Mr Cameron could only be secured by GAML if GAML entered into the agreement with Bacchus. This representation was alleged to be false and misleading because neither Mr Crouch nor Bacchus had any agreement, understanding or arrangement which would have prevented GAML engaging Mr Cameron directly. GAML sought a declaration that the agreement was void ab initio and damages of $75,942.14. GAML also provided lengthy particulars of Bacchus being in substantial breach of the agreement. They consisted of allegations that Bacchus had not carried out virtually every one of the obligations set out in the Memorandum of Agreement.

At the hearing, GAML was granted leave to file a Further Amended Defence and Counterclaim. This added a plea that Bacchus had been unjustly enriched at the expense of GAML in the sum of $75,942.14 I was also told that GAML was no longer pressing the uncertainty argument.

Mr Crouch said that on 10 June 1999 he met Mr Morcom and Mr Silver, just after his return from the United States, from what, he thought, had been a "very successful" visit. They spent most of the day discussing the business. In order to finalise his arrangements with GAML, he asked Mr Silver to sign the Memorandum of Agreement, which Mr Silver did, as a director on behalf of GAML. Mr Crouch said that after the meeting the three of them went to dinner at a restaurant called the Rangoon Racquet Club and that they split the bill three ways. He produced his Diners Club account showing a payment of $60 to that restaurant on that day. He denied that Mr Silver paid the bill for all three of them.

Mr Silver denied that he had signed the Memorandum on 10 June 1999. He said that on 1 July 1999 he and Mr Morcom had driven from Melbourne to Sydney in separate cars but in sight of each other. When they arrived at Mr Morcom's office at 222 Clarence Street, Sydney late in the afternoon, he was tired after the long drive. He found Mr Crouch was at the office. Mr Silver said that he was shown a contract by Mr Morcom and was asked to sign as the second director on behalf of GAML. Mr Silver said that he responded by saying that he was tired and that he would read it in the morning. Mr Silver said that Mr Crouch said that if he did not sign the agreement with his company, GAML would not be able to secure Mr Cameron's services. Mr Silver said that Mr Crouch said "viciously" and emphatically:

"This project needs Chris Cameron and without Chris Cameron it's going to fall over. I am the only one, only one, who Chris Cameron is prepared to deal with."

Mr Silver also said that Mr Crouch threatened that if the contract was not signed he would withdraw himself and Mr Cameron from the project and place an advertisement in the Australian Financial Review to say that Mr Cameron was no longer associated with GAML's project. He would "bring down ... discredit the whole project". Mr Morcom also threatened that he would do the same. Mr Silver said that he believed these threats and thought they would be particularly damaging. He therefore signed the agreement. He said that the three men then went to dinner at the Rangoon Racquet Club, which had been recommended by Mr Crouch. Mr Silver said that he paid for the whole meal. He produced his American Express account showing a payment of $190 to that restaurant on 1 July 1999.

Mr Crouch denied that he told Mr Silver that Mr Cameron's services could only be secured by GAML if GAML entered into an agreement with Bacchus. He said that he felt that it was necessary to provide Mr Cameron with the comfort of a binding agreement because he was lending his name and reputation to the project, and that the agreement with Bacchus was purely a means of providing that comfort and security. But it did not have to be with Bacchus. "It could have been done through any other entity". There was no margin or handling fee in it for Bacchus. Mr Crouch agreed that there was discussion with Mr Silver about "securing" the services of Mr Cameron and "maintaining his reputation", but denied that he said to Mr Silver that he would ruin the project if Mr Silver did not sign the agreement.

There were, therefore, two contrary versions of the signing of the Memorandum of Agreement by Mr Silver. The third person present, Mr Morcom, was not called to give evidence by either side. In my opinion, no adverse inference can be drawn against GAML for failing to call Mr Morcom. There was evidence that Mr Morcom and GAML had had a falling out and as Mr Martin of counsel, who appeared for GAML, submitted, it was open to Bacchus to have called Mr Morcom.

Further, I do not find the two credit card accounts to be of assistance in resolving the dispute between Mr Crouch and Mr Silver. Each witness' credit card account is consistent with his evidence. Neither credit card account disproves or throws doubt on the other witness' evidence. Mr Silver said that he had only been to the Rangoon Racquet Club on the one occasion, but that statement gained no support from his credit card account. Mr Silver had made handwritten notes in biro down the side of his July account, which he explained were for the purpose of claiming and justifying business expenses for himself and Mr Morcom. Thus, he said that the note alongside the Rangoon Racquet Club entry - "Sydney-Meals BDS/WM" did not purport to be recording everyone who was present but simply indicating that Mr Morcom had also participated in the meal. There were also handwritten notes in pencil alongside the Rangoon Racquet Club entry, which referred to Mr Crouch being present, but as Mr Silver said that these notes had been written for the purposes of this litigation, I will ignore them.

It is probably not important whether the signing took place on 10 June or 1 July 1999, but because I accept Mr Crouch's other evidence in respect of the signing, I find that it occurred on 10 June 1999. The reasons why I prefer Mr Crouch's evidence on this point are as follows. First, I found Mr Crouch to be the more impressive witness and his account to be more plausible. For example, I consider it most unlikely that the three men would have gone out to dinner together and that Mr Silver would have paid the bill for all of them, after such an unpleasant and outrageous episode.

More important are the apparent changes in Mr Silver's version of events. He said that he told Mr Jellyman on 6 July 1999 about Mr Crouch representing to him that he had to sign the agreement if GAML wanted the services of Mr Cameron and about Mr Crouch and Mr Morcom threatening to destroy the project if he did not sign. There is no reference to these serious allegations in Mr Jellyman's contemporaneous notes or in his telephone conversation with Mr Crouch or his letter to Bacchus of 15 July 1999. Mr Jellyman said that he was so angry when he was told about the agreement with Bacchus that he did not pay much attention to a lot of what Mr Silver said in the car on 6 July. Nevertheless, once litigation commenced it would seem surprising if Mr Jellyman did not obtain a full account of the signing from Mr Silver and that this important evidence was not conveyed to GAML's solicitors by one or other or both of Mr Silver and Mr Jellyman. Yet, there is still no hint of any such allegations in the correspondence from GAML's solicitors prior to the commencement of the proceeding or in the original Defence pleaded by GAML. I am satisfied that initially the solicitors were not told of Mr Silver's allegations about Mr Crouch's representations and threats because if they had been, it would be extraordinary, in my opinion, for there to be no reference to such conduct in either the solicitors' letter or the Defence. It was not until May 2001 that the allegation about the fraudulent representation appeared in the Amended Defence and Counterclaim, at the same time as reliance on the lack of power or authority defence was abandoned. Even then, the allegation is limited to the representation and nothing is said in the pleading about the duress imposed on Mr Silver by the threats allegedly made by Mr Crouch and Mr Morcom.

Therefore, it seems to me that Mr Silver's version of the signing is inherently improbable. The late appearance of the allegation, and even then not in its current form, leads me to conclude that I cannot accept Mr Silver's evidence on this point.

Accordingly, GAML's first basis of the defence to the claim by Bacchus fails as does the first ground of its counterclaim. This finding of fact means that I do not have to consider issues such as breach, reliance or causation in respect of the alleged fraudulent representation which could also have created problems for GAML.

GAML's second ground of its defence to the claim was that it was entitled to terminate the agreement for non-performance by Bacchus. Unlike Bacchus, GAML had no right to terminate by the giving of a period of notice. But it could terminate the agreement if Bacchus failed:

"to deliver within reasonably commercial terms the conditions of the Memorandum of Agreement as executed."

Mr Martin submitted, and Mr Settle of counsel, who appeared for Bacchus, did not argue to the contrary, that this meant that GAML could terminate the agreement if Bacchus did not perform its obligations under the agreement in a reasonably commercial manner. I accept this submission.

However, the difficulty confronting GAML is that, having terminated the two year agreement after only six weeks, in mid July 1999, it has to show that what Bacchus did in that short period was not a reasonably commercial attempt to perform its obligations. I have concluded that the defendant has not established that this proposition is correct. On the contrary, I am satisfied that what Mr Crouch did on behalf of Bacchus prior to the termination of the agreement was a reasonably commercial attempt to perform its obligations. Mr Crouch said that he flew to the United States with the aim of interesting investors in that country in the project, that he was involved with Milne & Partners in the placement of the advertisement in the Australian Financial Review and the preparation of a basic marketing plan including use of advertisements in specialist investment magazines and publications and a direct mail campaign, that he commenced preparation of a proposal for a business based on the export and reconstitution of Australian grape juice, that he briefed the project's sales staff and that he spent "a lot of time in Pokolbin" with Mr Cameron. I accept that evidence.

The main attack on Bacchus' alleged failure to perform was that Mr Crouch did nothing about marketing the project to potential investors at a time when the lack of sales was critical to the viability of the project. Mr Crouch agreed that this was a "primary responsibility" and referred to the advertisement in the Australian Financial Review. The defendant argued that this was placed too late, because units had to be purchased before 30 June if a tax deduction was to be claimable. However, it was not Bacchus' fault that its services were not engaged until 1 June 1999. In any event, I do not accept the submission that Bacchus did nothing in respect of marketing the project.

Secondly, Mr Martin criticised Mr Crouch for referring to the Hunter Valley and failing to mention the Hillston Grove vineyard in the promotional material he sent to the American investors. How could this work give him any entitlement to remuneration from the defendant, he asked. Mr Crouch explained that a processing plant in the Hunter Valley for the grapes grown on the Hillston Grove vineyard was one of the possible outcomes for the development of the project. He therefore rejected the suggestion that his work in the United States was not part of the task of encouraging people to invest in the project. His position was probably best summarised in the following answer:

"... stage 1 was a very effective advertisement in the Fin Review, stage 2 was off shore investments to maintain the cash flow plus generate a marketing program to maintain domestic cash flow."

It therefore seems to me that there was no basis in mid July 1999 for GAML to terminate the agreement for non-performance by Bacchus. The work it had performed to date did constitute, in my opinion, a reasonably commercial attempt to perform its obligations. Accordingly, this ground of GAML's defence to the claim also fails.

The second ground of the counterclaim was that Bacchus had been unjustly enriched by receipt of the payment by GAML of the $45,000 in respect of Mr Cameron, at a time when there was no obligation to pay, nor any present entitlement of Mr Cameron to receive, that sum. GAML submitted that Mr Cameron's entitlement was to be paid for three months' work "after he had attended at least 20 seminars. There is no evidence this occurred."

I do not agree with the submission. First, although the actual agreement between Mr Cameron and Bacchus was not put into evidence, its suggested form, Appendix 2 to the agreement between Bacchus and GAML, stated, in part:

"CC will be required to attend and participate in 20 sales seminars over a period of 3 months from the date of the first seminar and agree to the use of CC's name and likeness in promotional activities. During the initial period of 3 months, CC will also be required to provide advice and recommendations in all aspects of the operation and design of a winery and the sale and marketing of bulk and bottled wines, grape juice and related products. CC or nominated entity will be entitled to receive a total remuneration of $45,000 in respect of services rendered plus any expenses previously agreed which are incurred in the provision of those services."

Thus, it seems to me that it is not correct to say that Mr Cameron's entitlement to his payment of $45,000 did not arise unless or until "he had attended at least 20 seminars". His obligation was to attend and participate in 20 sales seminars over a period of three months, to agree to the use of his name and likeness in promotional activities and to provide relevant advice and recommendations, all of which it seems he probably did, according to Mr Crouch. Whether or not he attended the required number of seminars depended on whether such occasions were arranged. It was not his obligation to organise them, merely to attend as and when required. There was no suggestion of any failure by Mr Cameron to do as requested. His entitlement to payment of the sum of $45,000 had, therefore, arguably fallen due by the time Bacchus sent its first account to GAML on or about 15 June 1999 and certainly by the time of the second account in mid July 1999. According to Mr Crouch, Mr Cameron had been attending seminars to promote the Hillston Grove project since April, when Bacchus had reached agreement with Mr Cameron about his engagement.

Secondly, in my opinion, in order to make out its case for a return of $45,000, the onus was on GAML to establish that Mr Cameron was not entitled to payment of the $45,000, by failing to attend 20 sales seminars when requested to do so, or for whatever other reason. There was no onus on Bacchus to prove that Mr Cameron "had attended at least 20 seminars." The lack of evidence about Mr Cameron's role therefore went against GAML and not Bacchus. In any event, in the light of Mr Crouch's evidence that in April, May and June 1999, Mr Cameron had attended "a lot of sales seminars" organised by Messrs Morcom and Silver and the absence of any complaint by Mr Silver that Mr Cameron had not attended seminars when requested to do so, I would have been prepared, if necessary, to conclude that Mr Cameron "had attended at least 20 seminars."

Accordingly, there is no basis, in my opinion, to the counterclaim and it will be dismissed.

The one remaining issue is the quantum of the plaintiff's claim. Pursuant to the agreement with GAML, Bacchus was entitled to be paid $12,500 per month for 24 months or a total of $300,000. This amount was reduced to the sum of $275,000 because GAML had paid $25,000 as part of the $75,942.14 it paid in response to the statutory demand. In calculating the claim, Bacchus gave credit for the sum of $37,500 earned from other work between July 1999 and June 2000 and for the sum of $60,096 earned by Mr Crouch personally between 8 January and 31 May 2001. Thus, Bacchus claimed the balance of $177,404.

On behalf of GAML, Mr Martin submitted that the plaintiff's damages must be the net amount of income it would have received if the contract had not been breached. Relying on Bacchus' financial statements for the financial years 1998-1999 and 1999-2000, which showed a net profit of $4,426 and a loss of $2,058 respectively and Mr Crouch's concession that his company's financial statements were prepared in the most tax effective way, Mr Martin argued that any extra income earned by Bacchus would have been largely distributed (mainly by the payment of extra salary to Mr Crouch), leaving only "a very modest profit for the plaintiff." He submitted that it was only this very modest profit which should be awarded to Bacchus as its damages.

In support of his submission, Mr Martin referred me to the decision of the Court of Appeal of the Supreme Court of Queensland in Hadoplane Pty Ltd v Edward Rushton Pty Ltd[1]. In that case, the plaintiff was a company whose shareholders, directors and only employees were Mr and Mrs Gillett. Its only business was a contract with the defendant for the provision of services. It expended most of the income it received under the contract on the remuneration of the Gilletts. The defendant repudiated the contract. As a result, the plaintiff's gross income was reduced and it ceased paying remuneration to Mr and Mrs Gillett. The plaintiff appealed against the trial judge's assessment of damages on the basis of its loss of net profits and not on the basis of its loss of gross income. It was argued that the defendant should not have the advantage of the circumstance that the Gilletts happened to arrange to receive particular sums from their company, the plaintiff, rather than other sums, and chose to receive them by way of salary and superannuation contributions rather than in some other form. Even if a repudiating party has no obligation to pay damages corresponding to the loss of income of employees of the innocent party who are put out of work by the repudiation, it was submitted that the position was different where the employees control the employer.

Counsel for the defendant submitted that the only relevant loss was that of the plaintiff, not that of any of its employees, and that the plaintiff was only entitled to be placed in the same position as if the contract had been carried out, which involved taking into account the expenditure which, on the evidence, it would have incurred in the future in earning the contract sum. Thus, it was submitted that the trial judge had correctly assessed the damages by taking into account the plaintiff's average profit of $2,000 per year in the first two years of the contract.

The Court of Appeal by a majority dismissed the appeal. Pincus JA delivered the leading judgment. His Honour accepted the defendant's submission that the measure of damages was net profit rather than gross income. He refused to lift the corporate veil and said:

"It seems to me unfortunate in the present case that the Gilletts, whose loss has been considerably more than their company's, have no cause of action. But it is a familiar notion that the use of a company structure can bring with it complications and disadvantages, as well as the hoped-for advantages. ... In my view both the contention that in assessing damages the plaintiff should be held entitled to a calculation based on the gross receipts lost, without regard to expenses incurred, and the alternative analysis giving the plaintiff (in one way or another) the value of its shareholders' lost earnings must be rejected."[2]

"While the result is an unfortunate one from the composite view of the appellant company and of Mr and Mrs Gillett, it is a consequence of the legal structure that was created for reasons which were thought to be of overall advantage at the time. To introduce exceptions would I think create uncertainty in the law and also perhaps jeopardise the advantages which currently follow from a relatively strict adherence to the principle of separate corporate existence."[3]

"The question is whether such monies paid by the appellant to those persons [the Gilletts] should properly be categorised as an expense of which it is relieved by the wrongful conduct of the respondent in terminating the agreement. The question is not without difficulty, but ultimately I have come to the conclusion that no such expense is involved here. The payment of any money to the Gilletts was only possible after it had received money from the respondent pursuant to the agreement, and such a payment involved a decision as to the disposal of money in fact received. That decision was one of the company (as distinct from the Gilletts) as to how money received from the respondent was to be distributed. There is no reason in principle why the appellant could not have made a decision to invest those monies, or to acquire a capital asset in order to improve the efficiency of the company's business, or to make a gift of some or all of it to a charity. The result of a decision by the appellant as to how money received pursuant to the contract should be disposed of cannot, in my view, be categorised as an expense in generating that income."[4]

Whilst the judgment of the Court of Appeal is, with respect, of considerable assistance, it does seem to me that Mr Settle was correct in submitting that the factual situation in the Queensland case was not the same as in the case before me. In the earlier case, there was a history of over two years of the receipt of income and the payment of salaries such that only a very small net profit was made by the company. Here, the contract was only on foot for less than two months. Just what effect that fact has on the calculation of the plaintiff's loss is the question to which I now turn.

In my opinion, the best way of calculating the damages suffered by Bacchus is to look at each relevant financial year separately. Bacchus worked for GAML for one month (June 1999) in the financial year 1998-1999. Payment for that month was eventually made by GAML as part of the $75,942.14 paid on 30 August 1999 pursuant to the statutory demand. There was, therefore, no loss in respect of the financial year 1998-1999.

According to the High Court of Australia in The Commonwealth v Amann Aviation Pty Ltd[5]:

"The general rule at common law, as stated by Parke B. in Robinson v. Harman ((1848) [1848] EngR 135; 1 Ex. 850 at p.855 [1848] EngR 135; [154 ER 363 at p.365]) is 'that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.' This statement of principle has been accepted and applied in Australia (see Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454 at p.471, per Gibbs J.)"[6]

Therefore, in order to calculate the damages to be paid to Bacchus in respect of the 1999-2000 financial year, one first has to consider what the income and expenses would have been, if there had been no breach of the agreement. The payment for June 1999 would have been made on time at the end of that month so that Bacchus' income is reduced by $12,500 from $113,625 to $101,125. On the other hand, in addition to the July 1999 payment, Bacchus would have received a further $137,500 (11 payments of $12,500) from GAML, but would not have been able to earn the $37,500 from other work, so that its total income would have been $201,125 or a net increase of $100,000. On the expenses side, I consider that the item of $25,173 for legal expenses would not have been incurred, thus reducing Bacchus' expenses from $115,683 to $90,510. These changes convert Bacchus' actual loss of $2,058 into a profit of $10,615. However, I consider that some extra expenses (in respect of items such as computer costs, internet, postage, printing and stationery, telephone and travelling expenses) would probably have been incurred by Bacchus if it had worked for GAML throughout the year and not just for a few weeks in July, plus whatever time was spent earning the $37,500 from other consulting work. The particular items I have mentioned totalled $12,370 in 1999-2000. It is very difficult to decide how much to allow for the extra expenses because there was very little exploration by GAML of what extra expenses might have been incurred and what the amount of the increase might have been. Nevertheless, as Mason CJ and Dawson J said in Amann:

"The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can (Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127 at p.143; McRae v. Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 at pp.411-412; Chaplin v. Hicks [1911] 2 KB 786 at p.792). Indeed in Jones v. Schiffmann ((1971) [1971] HCA 52; 124 CLR 303 at p.308) Menzies J. went so far as to say that the 'assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation'. Where precise evidence is not available the court must do the best it can (Biggin & Co. Ltd. v. Permanite Ltd. ([1951] 1 KB 422 at p.438 per Devlin J.)"[7]

As I have said, Mr Martin strenuously argued on behalf of GAML that I should find that most of the extra income would have been paid to Mr Crouch in the form of salary or director's fees. Clearly, there was flexibility in the arrangements for payments by Bacchus to Mr Crouch. In the 1998-1999 financial year, he received no salary and $15,000 as director's fees. In 1999-2000, he received a salary of $48,800 and nothing for director's fees. Mr Martin submitted that, in order to reduce the tax bill, Bacchus would have increased its payments to Mr Crouch and that, therefore, its loss would have been significantly reduced. I accept that one has to assess the loss of net profits, not the loss of gross income, of the contracting party. But given that the basis of Mr Martin's submission was the concession that the financial affairs of Bacchus were managed in the most tax effective way, it seems to me to be quite unrealistic not to consider the taxation impact on Mr Crouch of the suggested increase in his remuneration. In the 1999-2000 financial year, a personal income of $48,000 meant that Mr Crouch was paying 43 cents tax in respect of each dollar of income over $38,000.[8] This compared with the company tax rate of 36 cents in the dollar.[9]

Mr Settle submitted that it could not be assumed that Bacchus would have increased Mr Crouch's remuneration or that it would have incurred other expenses in order to minimise its taxable income. He submitted that it was "pure speculation." For example, some of the extra income might have been retained for capital expenditure or invested by the company. Because of the taxation implications, I do not accept that Bacchus would have necessarily increased Mr Crouch's remuneration even though it would have been receiving significant additional income. Nor do I accept that Bacchus would have necessarily incurred other expenses in order to distribute all or most of the extra income, thereby reducing its net profit to a "very modest" figure. Nevertheless, in my opinion, some allowance should be made for the likelihood that there would have been some additional expenses incurred by Bacchus (including the extra expenses referred to above.) Doing the best I can, I consider that the sum of $25,000 should be added to Bacchus' expenses.

This means that the profit that would have been made by Bacchus during the 1999-2000 financial year is the sum of $85,615 ($201,125 minus $90,510 minus $25,000). Its loss in that year as a result of GAML's repudiation is therefore $75,000 ($85,615 minus $10,615).

There is a further complication in respect of the next financial year. As I have said, in its claim, Bacchus gave credit for the sum of $60,096 earned by Mr Crouch personally between 8 January and 31 May 2001. I do not consider this is the correct approach. In my opinion, Bacchus effectively abandoned any attempt to obtain other work in substitution for the GAML contract when Mr Crouch commenced working for another employer on 8 January 2001. Thus, it is not entitled, in my opinion, to any damages in respect of income lost in the period after 8 January 2001. It would seem sensible to bring that date forward to 1 January 2001, bearing in mind that presumably Bacchus did not really attempt to obtain substitute work in, at least, the week preceding the commencement of Mr Crouch's other employment.

What then is the amount of damages to be paid to Bacchus in respect of the period between 1 July and 31 December 2000? The evidence of Mr Crouch was that Bacchus carried on no business during this period. Again, one has to consider what income and expenses there would have been in this period, if there had been no breach of the agreement. The income would have been $75,000 (six payments of $12,500 - an increase of $75,000). In all probability, because of cost increases, the operating expenses in 2000-2001 would have been slightly more than the previous year's figure. I consider an amount of about $500 to be a fair estimate of this increase. (For ease of calculating the damages as a rounded amount, I will use the figure of $490). Then there is the issue of Mr Crouch's remuneration. The tax scales had been changed for the 2000-2001 financial year. Now, an individual paid only 30 cents tax on each dollar of income between $20,001 and $50,000 and 42 cents in the dollar between $50,001 and $60,000.[10] This compared with the reduced company tax rate of 34 cents in the dollar.[11] Therefore, I consider it appropriate to assume that Bacchus would have paid Mr Crouch remuneration of at least $50,000 in this financial year, if there had been no breach, but again I reject the submission that Bacchus would have necessarily increased Mr Crouch's remuneration to utilise virtually all of the extra income. However, any small increase in Mr Crouch's remuneration has already been taken into account in the figure of $25,000 in the previous year's calculation, by way of the allowance for the likelihood that there would have been some additional expenses incurred by Bacchus. This means that the estimate of the expenses for this six month period is $58,000 (one half of $115,510 plus $490).

Thus, in the period between 1 July and 31 December 2000 the loss suffered by Bacchus as a result of GAML's repudiation is $17,000 ($75,000 minus $58,000).

I therefore assess Bacchus' damages at $92,000. I will hear the parties on the question of interest and costs.

[6] [1991] HCA 54; (1991) 174 CLR 64 at 80 per Mason CJ and Dawson J. See also Brennan J at 98; Deane J at 116; Toohey J at 134; Gaudron J at 148 and McHugh J at 161.

At a glance

Court

Decision date

Before

Source

Judgment (82 paragraphs)

Parties

Cases Cited (4)